Nordstrom market segmentation

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Copyright Managerial Marke�ng

James Finch University of Wisconsin, La Crosse

Bridgepoint Educa�on, Inc.

VP of Learning Resources: Beth Aguiar

Editor-in-Chief/AVP: Steve Wainwright

Director of Editorial Technology: Peter Galuardi

Sponsoring Editor: Mireille Yanow

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ISBN-10: 1621780082

ISBN-13: 978-1-62178-008-3

Published by Bridgepoint Educa�on, Inc., 13500 Evening Creek Drive North, Suite 600, San Diego, CA 92128

Copyright © 2012, Bridgepoint Educa�on, Inc.

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Acknowledgments The Editorial team would like to thank the following reviewers for their feedback and guidance:

Christopher P. Blocker, Baylor University

Victoria L. Cri�enden, Boston College

Jacqueline Gilliard, Ashford University

Sharif Muhammad, Ashford University

M. Joseph Sirgy, Virginia Tech

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Chapter 6

Market Segmentation and Target Marketing

ès/SuperStock

Learning Outcomes

By the end of this chapter, you should:

Iden�fy the role of market segmenta�on in developing a marke�ng strategy and understand the ra�onale for segmen�ng markets. Recognize the different levels of market segmenta�on. Iden�fy the steps in the market segmenta�on process. Recognize each of the primary categories of bases for segmen�ng consumer markets. Iden�fy the bases used to segment business markets. Specify the criteria necessary for useful and effec�ve marke�ng segments and describe four basic strategies for reaching target markets.

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Ch. 6 Introduc�on No individual product or marke�ng mix can sa�sfy every consumer in a given product market. In most cases, the poten�al market for a product or service is simply too diverse or heterogeneous to be treated as a single or uniform target market. Market segmenta�on enables companies to adapt different marke�ng mixes to appeal to the unique needs of specific, homogeneous target market segments. This strategy creates growth opportuni�es and higher levels of customer sa�sfac�on. The op�mal variables used to segment any given market depend on many factors, including trends in buyer demand, the benefits being sought by consumers, and the characteris�cs of compe�ng brands.

Market segmenta�on describes both a process and strategy by which the total market for a product is divided into smaller parts or segments. Managers create segments by clustering prospec�ve buyers according to dis�nc�ve shared traits or factors in order to construct subsets of customers with similar needs. The resul�ng segments are said to be homogeneous with respect to these dimensions. As a consequence, consumers within each segment are more similar to each other on these factors than they are to buyers assigned to other segments.

The first half of this chapter inves�gates the purpose and strategic significance of segmen�ng product markets with a primary emphasis on the iden�fica�on of target markets. The general ra�onale suppor�ng four alterna�ve levels of segmenta�on is addressed. The second half of the chapter examines the processes involved in segmen�ng markets. A four-step model is introduced to iden�fy discrete clusters of buyers that will yield the best possible opportuni�es for profits and compe��ve leverage. The crea�on of these segments is necessarily guided by a relentless focus on customer needs and the firm's drive to sa�sfy its selected customers. The criteria and bases used in the specifica�on of useful market segments are discussed and four basic strategies for reaching target markets are introduced.

***

O�en�mes big opportuni�es can come disguised as small technical problems. In the late 1980s, Bob Benne� solved what might seem like an insignificant engineering challenge: how to combine a microwave oven with a compact refrigerator/freezer into a single opera�ng unit that would not overload conven�onal electrical circuits. The solu�on was simple. He built in a separate circuit between the two units that automa�cally turned off the refrigera�on side whenever the microwave oven was engaged. This limited the total amount of current that the combined unit could draw to 10 amps. He approached General Electric with this innova�ve concept, but the company had li�le interest.

Within five years of its introduc�on, product sales exceeded $12 million. However, the key to the success of this venture was not solely dependent on a technological innova�on. From the incep�on of the company, Bob Benne� had a clear understanding of the strategic significance and necessity of market segmenta�on. Today, the home page of MicroFridge (www.microfridge.com) is organized according to the company's six primary target markets: individuals (home users), academic ins�tu�ons, hotels, governmental/military, seniors, and office product suppliers.

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Gerber is one of the most popular baby food brands in the world. What factors other than geography can affect the company's sales?

Associated Press

6.1 Strategic Ra�onale for Segmen�ng Markets Market segments are clusters of prospec�ve and current customers who are similar to each other in ways that lead them to respond to a firm's marke�ng mix similarly. Marke�ng managers create or detect segments as a means of improving brand performance and profitability. The essen�al principle of segmenta�on is to divide the total market into dis�nct submarkets based on similar wants, needs, behaviors, or other characteris�cs to enable companies to be�er serve the specific wants and needs of smaller groups. Segmenta�on enhances customer sa�sfac�on and provides marketers with opportuni�es to build segment-specific compe��ve advantages.

The strategic significance of segmenta�on in compe��ve markets is substan�al. It permits companies to focus their limited resources on building greater levels of customer sa�sfac�on within a limited cluster of buyers. By concentra�ng their efforts in this way, organiza�ons can op�mize both the efficiency and effec�veness of marke�ng programs.

Perhaps less obvious is the strategic value of segmenta�on in making the firm more responsive to market dynamics. Companies that have focused their resources on specific segments have a greater understanding of buyers' wants and the character of the opera�ng environment. Consequently, they should be be�er prepared to respond to changes in the behavior of their suppliers, intermediaries, and compe�tors than firms with a broader market focus.

Marke�ng to Segments

The importance of segmenta�on to the success of the firm's marke�ng programs, however, depends on several market- specific characteris�cs. As product markets mature, the rate of overall sales growth declines. In many product markets, sales growth may remain negligible for years and some�mes decades. This is par�cularly true when overall popula�on trends are unfavorable to the sales of specific products. For example, the sale of baby care products is dependent on the prevailing birthrate within a given geographic market. In the absence of aggregate sales growth, the ba�les for market share o�en intensify. Segmenta�on takes on greater strategic importance within this context as firms compete to build sales volume at each others' expense by finding be�er ways to sa�sfy segment-specific preferences. In this sense, each segment becomes a unique ba�lefield in an ongoing war.

Other types of market-specific characteris�cs that impact the value of segmenta�on include changes in the economic and cultural composi�on of buying groups. As markets become more diverse in these ways, profitable opportuni�es to refine or redefine segment profiles emerge. This pa�ern is o�en observed in developing na�ons around the globe. As incomes, educa�onal levels, and lifestyles go through transi�ons over �me, marketers have opportuni�es to appeal to new clusters of buyer preferences.

Think About It

Cultural shi�s within na�onal boundaries can be more difficult to detect than changes in other countries. Iden�fy three significant cultural changes within this country's borders that have taken place in the past decade. Be specific. Iden�fy the subcultures at the center of the change process and those groups being most directly impacted.

How have these changes created new marke�ng opportuni�es?

How have they affected the ways in which brands compete?

Market segments can be created based on any product or buyer characteris�cs that will yield the most efficient and effec�ve approach to selling the product in a compe��ve market. This o�en includes the refinement of old segment defini�ons as well as the crea�on of wholly new segments within established product markets. In some instances, the study of alterna�ve market segmenta�on opportuni�es may lead to brand extensions.

Brand Extensions

Brand extensions are new products or services introduced under the same brand name as exis�ng goods. Familiar examples of successful brand extensions include Jell-O Instant Pudding, Harley Davidson Apparel, Febreze Candles, and Na�onal Geographic Television. Brand extensions represent an effort to capitalize on the posi�ve impressions and values associated with the exis�ng brand name. This can have the synergis�c effect of increasing brand awareness and profitability across mul�ple product categories. As with other forms of product development, a successful brand extension requires extensive knowledge of the selected market segments.

The failure to understand the unique preferences, values, and a�tudes of targeted market segments can result in failed extensions and damage to a valued brand name. Examples of brand extensions that reflect a weak linkage between the core brand iden�ty and the new product concept include Smith & Wesson Mountain Bikes, Colgate Kitchen Entrees, Hooters Airlines, and Cheetos Lip Balm. In

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Febreze extended its brand from exclusively air freshener sprays to include candles and scented oil.

Associated Press

addi�on, it is important to remember that even a seemingly successful product launch can work against the brand's significance to target segments if it blurs or dilutes the brand's iden�ty or posi�oning.

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Frontera salsas proved to be best sellers in Whole Foods Markets around the U.S. Now, Frontera wants to go up against mass-marketed products made by the likes of Tos�tos and Pace. How is Frontera marke�ng its brand? Which consumer group does it interest?

6.2 Levels of Market Segmenta�on As noted in Chapter 1, it is a common misconcep�on that market segments are somehow preexis�ng divisions of the market that the marke�ng manager needs to discover. This is not the case. Marke�ng managers can create market segments based on any product or buyer characteris�cs that will be useful or profitable. Consequently, markets can be segmented at various levels based on the intended use of the informa�on and the character of the market itself.

In a cost-free environment, the best path to sa�sfying buyers would be to provide a unique, custom-designed product and marke�ng plan for each individual consumer. Although this is possible in some instances, in most contexts sellers need to develop programs suited to clusters or pools of buyers to make them profitable. The most effec�ve and efficient segment size for this purpose can be thought of as the op�mal level of market segmenta�on. There are four levels of market segmenta�on: mass marke�ng, segment marke�ng, niche marke�ng, and customized marke�ng.

Mass Marke�ng

In mass marke�ng, the seller does not differen�ate between prospec�ve buyers at all. Every individual within the market is part of the company's target market. Sellers make no effort to create separate marke�ng mixes to suit different types of buyers according to their preferences and needs. In most instances, this strategy results from a percep�on that there are no significant product-related differences between poten�al buyers. Alterna�vely, marketers may pursue this path if they cannot iden�fy discrete market segments apart from the whole that are financially viable. Some products that are regarded as commodi�es (e.g., water so�ener salt) can be sold this way. Mass marke�ng is some�mes referred to as undifferen�ated marke�ng.

Henry Ford's marke�ng strategy for the Model T is o�en held up as one of the most successful applica�ons of mass marke�ng. By offering buyers the same car "in any color as long as it is black," he was able to capitalize on the scale economies related to the mass produc�on, mass distribu�on, and mass promo�on of one product for all consumers. This approach to selling has grown increasingly difficult, however, as consumers gain access to more channels of distribu�on (including e- commerce), increasing levels of global compe��on, and a growing array of media sources and informa�on.

Segment Marke�ng

Segment marke�ng, or differen�ated marke�ng, is a term used to describe marke�ng strategies that differen�ate between customer groups within a product market. In contrast to mass marke�ng, this approach enables sellers to execute marke�ng plans for individual brands targe�ng specific clusters of prospec�ve buyers. Matching marke�ng mix decisions to the preferences of targeted segments generally improves the fit between the brand and consumers' needs, thereby providing higher levels of customer sa�sfac�on. In many markets, the decision to pursue some specific segments rather than others may also limit the range of relevant compe�tors challenging the brand.

Although there are many different bases on which sellers segment markets, iden�fying the specific benefits consumers seek from the product category is o�en the first �er of inves�ga�on in defining fairly broad segments. Segment marke�ng is characteris�c of many of the products we purchase frequently, such as most consumer packaged goods, popular lines of apparel, and electronics. Most items sold through big-box retailers and chain grocery stores fall into this category. Segment marke�ng is more narrowly targeted than mass marke�ng but less precise in prac�ce than niche marke�ng.

Mass-Market Compe��on

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The Fat Tire brand, which stems from the New Belgium Brewing Company, reflects the poten�al profit from niche marke�ng.

Associated Press

Think About It

Breakfast cereals seem like a pre�y basic household staple, right? Yet the typical grocery store will stock more than three dozen brands from companies such as Kellogg's, General Mills, Quaker, and Post. Many of these seem to be similar.

Are any brands being mass marketed? If so, which ones?

Who is the target market for some of the brands with which you are most familiar? Why can't large companies be more successful by mass marke�ng a smaller number of core brands, thereby reducing the expenses related to marke�ng a large number of different brands to several smaller market segments?

Niche Marke�ng

By concentra�ng on even smaller segments of the market, niche marke�ng allows the organiza�on to create more narrowly focused marke�ng plans for its brands than segment marke�ng approaches. Niche marke�ng is also known as concentrated marke�ng. At this level of segmenta�on, marketers use a narrower range of distribu�on channels and media op�ons to reach a smaller market containing fewer direct compe�tors.

O�en, the mo�va�on for targe�ng these narrowly defined niche markets is the recogni�on that buyers' needs are not being met by exis�ng product and brand alterna�ves. If the group described by this gap is large enough to be sufficiently profitable, the opportunity can be pursued by either small or large firms within the industry. However, rela�vely small organiza�ons require less poten�al profit to make these types of new opportuni�es worthwhile. In addi�on, the lack of direct compe��on from large firms may make these niche markets especially a�rac�ve to smaller compe�tors.

This reality has given rise to ventures in virtually every sector of the economy. Many of the fastest- growing adver�sing agencies in the United States are small, specialized "bou�que" firms that focus on serving the unique needs of a limited client base. The success of microbreweries and cra� breweries such as the New Belgium Brewing Company, which sells the Fat Tire brand, also reflects the profit poten�al in niche marke�ng. The Internet has enabled the prolifera�on of companies serving unique product and service niches ranging from home-delivered gourmet pretzels to accoun�ng services for small business payrolls.

In some instances, very large organiza�ons may create fairly autonomous SBUs to independently sell to niche markets to defend the firm from losing market share on a piece-by-piece basis. Consider the strategy pursued by Birds Eye frozen foods group. Brands such as Freshlike, Voila!, and Steamfresh enable it to pursue segment marke�ng strategies to compete effec�vely in large segments of the market. However, it also appeals to a narrow market niche with its McKenzie's brand, by reaching buyers who want vegetables used primarily in the southern U.S. subculture. These include speckled bu�er beans, collard greens, okra, turnip greens, black-eyed peas, field peas, and purple hull peas.

Customized Marke�ng

Customized marke�ng, or micromarke�ng, represents the most extreme form of market segmenta�on insofar as each prospec�ve buyer is treated as a separate segment for marke�ng purposes. In contrast to the previous levels of market segmenta�on, the marke�ng plan for each customer is fi�ed to his or her own unique needs and preferences. Within consumer markets, this approach can most commonly be seen in the sale of custom-tailored clothing and shoes. Other examples are o�en seen in the high-priced end of consumer goods markets where one-of-a-kind homes, interior furnishings, jewelry, musical instruments, boats, and designer cars can be custom ordered for clients with the ability to pay. In fact, tailor-made products that convey significant pres�ge to their purchasers are available in almost every consumer product market.

Customized marke�ng is more prevalent in business-to-business market transac�ons than in consumer markets. In B2B exchanges, product specifica�ons, terms of sale, and distribu�on are o�en nego�ated on a one-to-one basis. Prime examples of customized marke�ng are found whenever products are built to the buyer's unique specifica�ons (e.g., manufacturing equipment, enterprise applica�on so�ware) and the price is nego�ated. The primary advantage to customized marke�ng is the seller's ability to precisely meet the buyer's needs. When financially feasible, this level of market segmenta�on provides the best opportunity to fulfill the marke�ng concept's promise.

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Colgate "Simply White" toothpaste targets the "whiter teeth" benefit segment.

PR Newswire/Associated Press

6.3 Procedure for Segmen�ng Markets As noted previously, the essen�al ra�onale for segmen�ng markets is to create clusters of prospec�ve buyers that will yield the best opportuni�es for profits and compe��ve leverage. These posi�ve outcomes stem from delivering the highest possible levels of customer sa�sfac�on by selling into discrete segments or clusters of buyers within a given product market.

Think About It

It can be a chicken-and-egg problem. The founda�on principles and overriding philosophy of marke�ng maintain that products should be developed based on a prior understanding of prospec�ve customers' needs. However, is it possible to segment a product market in a strategically meaningful way before you have a product to sell?

How can you reconcile the necessity of having a product before segmen�ng a market based on buyers' characteris�cs with the need to understand the buyer before developing a product?

Neither the academic discipline of marke�ng nor professional prac�ce has established a set of procedures for segmen�ng markets that is best in all situa�ons. In fact, many managers develop their segmenta�on schemes on a purely intui�ve level of analysis, based exclusively on their unique and in�mate knowledge of the product and prospec�ve clusters of buyers. However, a wide variety of more systema�c approaches to segmen�ng markets can be applied according to the unique demands of the task (Foedermayr and Diamantopoulos, 2008). The market segmenta�on process model presented here provides a flexible four-step approach that can be applied across a fairly broad range of situa�ons.

Step One: Iden�fy Primary Segmenta�on Bases

A large number of customer-related variables can be applied to the process of construc�ng a market segmenta�on plan. Many of these are discussed in detail in the sec�on that follows. However, most ini�al efforts at market segmenta�on begin with an understanding of the product-related benefits sought by buyers. This reflects what we've discussed previously regarding the func�onal value of the marke�ng concept as a compe��ve philosophy, the mo�va�onal roots of buyer behavior, and the primary importance of customer sa�sfac�on in the design and execu�on of marke�ng programs.

Consider the toothpaste market example that we first encountered in the discussion of market segments in Chapter 2. Based on product benefits, you can ini�ally iden�fy several poten�al segments. These benefits include hygiene-related factors such as the ability to fight cavi�es and prevent plaque buildup and gingivi�s. They also include aesthe�c/cosme�c benefits such as the ability to whiten teeth and freshen breath. Other benefits include sensory features such as flavor, appearance, and texture. Addi�onally, there is almost always a price-sensi�ve branch in consumer product markets that seek the lowest possible cost.

Using a benefit segmenta�on approach, the preliminary division of the market could iden�fy four primary benefit classes: hygiene, aesthe�cs, sensory, and price. Each of the subdivisions within the four, however, could be further delineated and treated as a separate, discrete segment unto itself. For example, "whitens teeth" and "freshens breath" could be treated as independent segments. In most situa�ons, the ini�al tendency should be to break the market into as many meaningful and unique benefit-driven segments as possible. If subsequent analysis determines that a segment is too small to financially jus�fy being recognized as a separate cluster of buyers, it can be absorbed into the next-most-closely related segment.

Recall that each benefit segment may recognize more than one set of poten�al benefits from using toothpaste. Those who seek whiter teeth are not indifferent to either the taste of compe�ng brands or their ability to fight cavi�es. However, this segment can be uniquely iden�fied as the group whose highest priority is whiter teeth. In fact, all segments within this par�cular product market may value all four basic classes of product benefits. However, they will differ from each other in the rela�ve importance a�ached to each.

Not all market segmenta�on efforts need to begin with a study of product benefits. Selec�on of other segmenta�on bases or variables may stem from the specific objec�ves of the analyst. Market geography, for example, may be a primary concern for retailers that overrides other considera�ons in some instances. At �mes, marke�ng managers may develop specialized segmenta�on models based on either their unique experience and intui�on or a systema�c study of exis�ng customer data. Alterna�vely, the efforts of a compe�tor to redefine the market through changes in its marke�ng mix may also prompt a reevalua�on of exis�ng market segment schemes. In each of these instances, however, remaining mindful of the essen�al benefits that a buyer is seeking from the brand must remain one of the primary considera�ons. In this sense, all market segmenta�on plans should be developed as benefit-segment plans to some degree.

Step Two: Name Segments and Develop Profiles

The second step in the process is to name each segment and develop a detailed profile for each. This involves iden�fying those characteris�cs that are most closely related to each segment's purchase behavior. Managers should recognize at the outset of this stage that the inten�on is to simply describe those who buy in response to specific benefits. The purpose is not to isolate the mo�ves for their behavior.

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For example, managers might name those customers who place the highest value on the aesthe�c benefits of toothpaste The Sociables (Haley, 1995). As illustrated in Table 6.1, the segment profile might include demographic descriptors (teens, young adults, unmarried), lifestyle characteris�cs (socially ac�ve, health-conscious), personality traits (outgoing, independent-minded), and other descrip�ve factors.

Table 6.1: The segment profile